How banks can develop a winning strategy in cross-border payments

This Q&A with our team of global payment leaders reveals how banks can thrive in the dynamic, global cross-border payments market.

In brief:

• Building on the 2022 PayTech report and with insights from industry experts, our latest Beyond Borders report delves into the cross-border payments world.
  
• In this article, global payment leaders answer some of the most burning questions facing the industry and identify strategic imperatives for banks.
  
• A FinTech approach – innovating with digital assets, adopting new data standards and harnessing screening technologies – will help banks succeed.

The cross-border payments sector is undergoing a profound metamorphosis. The digital revolution, underpinned by collaborative industry efforts and regulatory support, is ushering in a new era of financial transformation, and better outcomes for consumers, merchants and corporates.

How can banks and other market participants capitalize on this tremendous growth?

Our latest report Beyond borders: Capturing growth in the dynamic cross-border payments market explores the megatrends that are driving change. Crucially, it also identifies the six strategic imperatives that stakeholders must prioritize to secure and grow their role within this rapidly expanding market.

Here, the global team of payment experts Sanjeev Chatrath, EY Asia-Pacific Payments Leader, Alla Gancz, EY UK Payments Consulting Leader, and Jennifer Lucas, EY Americas Payments Consulting Leader, break down what banks and other marketplace participants should be thinking about, so they don’t miss out on the opportunities presented by this dynamic market.

Q: In the context of today's global economy, can you shed light on the current scale of the cross-border payments market and what’s driving growth?

Sanjeev Chatrath: 

Momentum has been building in the market in the last five or six years. Several factors are at work: post-COVID we have a more globally dispersed workforce, and more businesses have become global. In the past, multinationals were typically Forbes 500 or FTSE 100 companies; now you could be a small-to-midsized enterprise (SME) with customers anywhere in the world. E-commerce has had a massive impact, too. The market has really exploded, reaching almost US$190t in 2023, and looks to continue growing at a very healthy rate, close to 10% every year for the next six or seven years. With that size and scale comes an enormous revenue opportunity.

Q: Financial crime screening is time-consuming and resource intensive. What technologies can banks deploy to ease the burden and manage the complexities of compliance?

Alla Gancz:

The sheer volume and complexity of cross-border transactions make them a prime target for criminal activity, be that money laundering, financing of terrorism or sanctions evasion. Advances in technology increase the veracity and velocity of the threats, which in turn drives changes in regulation and compliance. The ground is constantly shifting, and banks are under intense pressure to keep enhancing their know your customer (KYC) and anti-money laundering (AML) protocols. If they’re still relying on time-consuming manual processes or a legacy technology infrastructure to deliver these protocols, their compliance risk increases. There’s a raft of advanced technologies that banks can draw on to enhance their screening capabilities. For example, using artificial intelligence (AI) and machine learning to process vast amounts of data and flag high-risk transactions in a split second, or using real-time monitoring to identify suspicious activity. But I would add that the human element is very important – the focus can’t just be on speed. It’s essential to upskill the people who’ll be using these technologies so that they are deployed effectively and with precision.

Q: The built-in programmability of digital currencies is a gamechanger for finance. How are wholesale cross-border payments leaders tapping into its potential?

Jennifer Lucas:

While programmability is used in some digital payment systems, it still has tremendous untapped potential. We’re seeing programmability in settlement mechanisms, such as delivery versus payment (DvP). Simultaneous payment and delivery is a straightforward concept, but in the cross-border payments market its impact is huge. It reduces settlement risk, overcomes currency and time zone differences and increases liquidity. Other use cases that spring to mind include triggering payments, setting limits on transaction value or volumes and creating advanced features for users, such as the deletion or temporary suspension of accounts.

Q: Nothing stands still in regulation. What major trends should banks and other market participants have on their radar?

Sanjeev Chatrath:

There has definitely been a shift toward greater dialogue and connectedness between regulators to try and avoid some of the unintended consequences of the past. These include increased costs, heavier compliance burdens and financial exclusion. Looking beyond financial regulation, data privacy, security and integrity have risen up the list of priorities. Consumers are becoming much more aware of their rights and data regulators are providing more clarity on the kind of infrastructure they want to foster. Banks need to be aware of this direction of travel.

Large companies with in-house banks moving money between entities in their network also need to bear in mind that some cross-border transactions might require a moneylender's license. There’s also regulatory interest around platform companies transferring value on wallets.

Q: When it comes to ISO 20022 migration, what progress have banks really made? And if they’re stuck, what’s holding them back?

Jennifer Lucas:

Banks are accelerating their transition toward an ISO 20022 native ecosystem. Most banks have been working through their priorities to ensure appropriate focus on modernizing their infrastructure and driving adoption of ISO 20022. With varied technology infrastructures in the back office and different levels of customer maturity, the program requires a thoughtful approach to optimize the investments and yield the best return for the entire financial ecosystem. As banks continue to progress, they should avoid focusing solely on timeline compliance and look to extract the value of migrating to a new, data rich standard.

Q: How can improvements to cross-border payments help underserved communities, especially in emerging economies?

Sanjeev Chatrath:

The pain points around cost, speed, transparency and access that the G20 cross-border payments roadmap is addressing are particularly felt by two groups: migrant workers sending remittances to their home countries and MSMEs making or receiving micropayments. For example, the global average for sending US$200 is around 6.4% – twice the sustainable development goal of 3%.¹ A cross-border payments ecosystem that’s based on digital solutions and leverages mobile technology can deliver more cost-effective, reliable ways of sending money across borders. This is what policymakers, regulators and stakeholders are working toward through initiatives, such as the ASEAN Cross-Border Payment Initiative (ASEAN XBPI), which connects domestic real-time payment systems and encourages the use of local currencies. This is playing a significant role in making financial services more accessible to underserved communities.

Q: What are some of the recent partnerships powering the cross-border payments world and where is the greatest opportunity for banks to collaborate?

Alla Gancz:

Strategic partnerships are reshaping the landscape of cross-border payments, fostering innovation and enabling banks to provide instant, cost-effective and seamless payment experiences. Some notable recent examples include:

• HSBC’s partnership with Visa to develop Zing, an international payments app that enables users to hold funds in 10 currencies, send over 30 currencies, and transact in 200+ countries and territories.
• DBS's collaboration with Mashreq, offering customers same-day and near-instant peer-to-peer payments to select markets in Asia Pacific, Europe and the Americas.

By co-creating innovative payment solutions and value-added services that leverage APIs, real-time processing, transaction pre-validation and mobile technology, banks and FinTechs can refine service offerings, increase operational efficiency and broaden their global footprint.

 Q: Where do you see the biggest opportunity for transformation in the cross-border payments industry over the next five to seven years?

All:

The cross-border payments industry is poised for significant transformation, particularly within the promising B2B and B2C sectors. The B2C market, propelled by the surge in e-commerce, is expected to reach a staggering US$4.7t by 2032. Concurrently, the B2B segment is expanding due to the growth in international trade and the eagerness of SMEs to explore cross-border opportunities. The integration of emerging technologies, such as digital assets, tokenization and smart contracts, is set to revolutionize the industry by enabling faster, more transparent and cost-effective transactions.

These innovations, alongside the implementation of real-time payment systems and the potential widespread adoption of tokenization, are key factors that will redefine the cross-border payment ecosystem. These technological advancements are expected to provide businesses and consumers with frictionless cross-border payment experiences, catalyzing industry growth and leading to a transformative era in global payments.